It’s one of the most common questions we get asked and it’s understandable why. Many landlords innocently misunderstand the difference between aCAPITALexpense and aREVENUEexpense. In particular, establishing the difference between a repair and an improvement and claiming only the mortgage interest not capital repayments on loans.
The common notion is that because you have spent money on your property, it automatically follows that you can set it off against your rental income.
Beware…!
Some expenditure never qualifies for any tax relief
Some expenditure is only allowable against the gain when you sell the property.
Some expenditure may be deducted from rental income in calculating taxable income.
Some expenditure may not be claimed as a deduction but is subject to special rules.
Let’s take things one at a time.
When you buy a property
The costs and expenses associated with the purchase are treated as part of the purchase price and cannot be set against rental income. We would advise you to prepare a simple statement of all the costs as follows:
Purchase price
Stamp Duty
Legal Fees
Building survey charges
Independent inspection charges
Auctioneers costs (for those of you who have bought through auctions)
Your solicitors’ completion statement should contain the majority of the costs
These can be deducted from the gain (or added to the loss) when you sell the property. You should keep a record of all the costs together with the supporting receipts so that you can claim Capital Gains Tax relief for the expenditure when you sell.
What happens if the deal falls through?
In short, any costs and expenses associated with a deal that falls through are never allowable.
So if you are thinking of buying a property and spend money instructing solicitors and arranging surveys and then decide not to proceed or worse still the seller pulls out, there is no tax relief for the costs.
So what are the allowable costs against rental income?
The general rule is that the expenditure must be expended wholly and exclusively for the Rental Income business. Here’s a list:
Finance costs (restricted for most residential properties)
The interest paid and arrangement fees on any loan taken out to purchase or improve the rental property together with any bank charges on a separate rental property bank account are finance costs. If it is a repayment mortgage, then it is only the interest element which counts as finance costs not the total repayments.
For commercial properties, Furnished Holiday Lettings (see above) and residential properties owned by limited liability companies, the finance costs are allowed in full.
For other residential properties owned by individuals or partnerships, from 6thApril 2020, the finance costs are restricted and only 20% of the finance costs can be claimed against the tax liability on the net rental income after deducting all other expenses and losses brought forward but before any finance costs. Prior to 6thApril 2020 there was a phasing in of the restriction over three years.
The best way of explaining this is by way of an example:
Joe is a teacher and is 49 years old; he is a 40% taxpayer. He has purchased a buy to let property as an investment. As he has owned the property for some time, the outstanding debt on the property is relatively low. This is how the finance cost is allowed:
| Actual Profit | Taxable profit | |
| Gross rents | 7,200 | 7,200 |
| Repairs and other tax deductible costs | 1,000 | 1,000 |
| Interest on mortgage | 2,500 | Nil |
| Net Rental profit | 3,700 | 6,200 |
| Tax at 40% | 2,480 | |
| Less interest relief at 20% on £2500 | 500 | |
| Net tax liability on rental income | 1,980 |
As you can see the effective rate of tax is 53.51% which is more than Joe’s marginal rate of 40%. Where landlords are highly geared, the tax liability could be more than the net rental income received.
Basic rate (20%) taxpayers should effectively receive full relief provided that the rental income before interest does not cause them to go into the higher rate of tax.
Higher rate taxpayers may wish to consider purchasing new properties in a limited company as finance costs are allowable in full. However, lenders do tend to charge a higher rate of interest on loans to limited companies.
Repairs and maintenance
Repair work carried out on the property can be claimed provided that it is not a capital improvement. If you lived in the property prior to letting it, then work carried out before the property is let is seen as maintenance of the property as a result of private use rather than for rental purposes, so cannot be claimed.
Repairs to furnishings cannot be claimed if there is a furnished residential letting.
Do not forget to include the gas safety certificate cost if applicable.
Legal, management and accountancy fees
You cannot claim any legal fees in connection with the purchase of the property or any fees for the initial lease if it is for more than one year. Any legal fees in connection with the renewal of a lease, a shorthold tenancy of less than 1 year, eviction of clients, rent collection or management fees and accountancy are all claimable.
Insurance
It is important that you insure the property and the premium for the buildings and/or contents can be claimed. Life assurance premiums are not claimable.
Rent, rates and council tax
You may pay ground rent if the property is a flat. The tenant normally pays the rates or council tax, but if you do pay these costs or there are any void periods where you pay these costs then these can be claimed.
Services
If you pay any service charges or for any other services in connection with the letting e.g. electricity in common areas, these should be claimed. If the property is a furnished holiday letting then it is likely that you will pay for electricity, gas, water, television licence, telephone and other services.
Wages
If you need someone to carry out a regular service for you e.g. cleaning, we recommend that you pay a fixed rate for that service and do not provide any tools or materials so that they can be treated as self-employed. However, if for example, you employ a cleaner for one hour a week and provide all the materials, then that person is probably an employee. Be aware, that if you do employ an employee, you need to ensure that you comply with Employment Regulations including Working Time Directive, National Minimum Wage, Health and Safety and PAYE/NIC. The national living wage from 1st April 2024 is £11.44 per hour for adults aged 21 and over.
We advise that you should ask your employee to complete a “Starter Checklist” which is available on the Government website. Provided that you do pay under £123 per week, you have no other employees and your employee marks either certificate A or B, you can retain the Starter Checklist and take no further action. If certificate C or no box is marked or you pay £123 or more per week it will be necessary to have a PAYE scheme in place. If you have a PAYE scheme then you will need to pay the employee under RTI (Real Time Information) even if they earn less than £123 per week.
Travelling expenses
Do you travel to the property to carry out maintenance or deal with issues with the tenants? If so you should claim the cost of travelling. It does have to be reasonable – if you live in London and spend a week on holiday in Cornwall, popping in for ten minutes to check that the holiday home next door was alright would not make the journey a business trip! If you travel by car, you can now claim the authorised mileage rates which are 45p per mile for the first 10000 business miles in a tax year and 25p per mile for each additional business mile.
Administration expenses
These can include postage, stationery, telephone calls and other administrative expenses. The rules for claiming the use of home as an office have changed from 6thApril 2013. Either a complex calculation has to be made justifying the charge or the following can be claimed depending on the hours worked in an office:
| Number of hours worked per month | Monthly claim |
| 25 or more | £10 |
| 51 or more | £18 |
| 101 or more | £26 |
It is unlikely that a charge for using your home as an office can be justified unless you are managing a number of properties yourself.
Other expenses
Any other expenses incurred wholly and exclusively for the property business can be claimed. The licence fee for Houses of Multiple Occupation (HMO) is claimable for example.
Property income allowance (alternative to expenses and capital allowances)
The property income allowance of £1000 can be deducted from your rental income (provided that the income is not received from a connected party) instead of any expenses. It is only worth claiming this allowance if your expenses are less than £1000 and they are less than the actual rent received. Youcannotclaim any expenses if you claim the Property Income Allowance. The allowance is designed to save people with low rental income having to declare and pay tax on that income rather than as a general tax saving measure.
Capital expenditure
The cost of purchasing or improving a property (e.g. an extension) cannot be claimed as revenue expenditure against your property income. The distinction between capital and revenue expenditure is not black and white. If you buy a property and simply redecorate it before you let it out, this will be considered to be revenue expenditure. If however, you bought a property for a significantly lower price than normal because it was in a poor condition and then carried out substantial works, this expenditure would probably be considered as capital expenditure.
However, most capital expenditure is eligible for relief for Capital Gains Tax purposes when you come to sell the property, so it is important that you keep records and receipts for the expenditure incurred.
Capital allowances (not available on residential lettings apart from furnished holiday lets)
Whilst structural works cannot normally be claimed, capital allowances are available on the purchase of fixtures, plant and machinery. There is an Annual Investment Allowance for expenditure up to £1,000,000. As most landlords will not be spending more than the annual limit or claiming for a car, cars and eligible expenditure over the annual limit are not discussed.
Examples of expenditure eligible for Annual Investment Allowance (not for residential properties) are as follows:
| Cookers Washing machines Dishwashers Refrigerators Electrical systems | Washbasins Sinks Baths Showers Water systems | Furniture Carpets Curtains Boilers Heating systems | Storage equipment Counters Machinery Lifts Alarm systems |
The list is not exhaustive and you should obtain further advice from us, particularly if your expenditure is over the annual limit.
If you sell an asset on which you have previously claimed Capital Allowances, the proceeds are taken into account and may create an additional income charge.
Replacement of Domestic Items relief
Where a residential property is not a Furnished Holiday let or no Rent a Room relief is claimed, the expenditure on replacing items of furniture and white goods will be allowed as an expense less any proceeds on the disposal of the item being replaced. The cost of assets which are not replacements is not be allowed as an expense.
Private use
If you use the property for private purposes, which is most likely if it is a furnished holiday letting or you are not claiming Rent a Room relief in your own home, then any expenditure claimed must be restricted for its private use.
If you have previously occupied a property then any expenditure which relates to that period of occupation cannot be claimed. So any maintenance of the property prior to the first letting is private. Conversely, if for instance you had paid an annual insurance premium on 1st April and left the property with a view to letting it on the following 1st October, then you would claim one half of the insurance premium paid even though it was paid when you occupied the property.
Finally…
This can be a confusing area for many landlords. Errors can be costly if they are picked up by HMRC. Choosing a property tax specialist to help you get it right could save you £000’s. Get in touch if you need some help.
DISCLAIMER
© Thandi Nicholls Ltd 2022 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circ*mstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circ*mstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S S Thandi and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
